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index clause

An index clause, also referred to as an inflation clause, a stability clause, or an indexation clause, redistributes inflation-related increases in the costs of claims between the ceding insurer and its reinsurer. In most excess-of-loss contracts, the ceding insurer's retention and the reinsurance limit amounts are fixed dollar (or other currency) amounts, and the reinsurer's liability triggers at the point the retention is met. If neither the retention nor the limit is indexed, claim inflation can cause a loss to reach the retention amount sooner and more frequently than anticipated. Further, if there is greater inflation after the claim reaches the retention amount, the reinsurer's liability will not increase with the rising cost of the claim. The index clause achieves redistribution of these inflation-related increases by adjusting the retention and limit amounts of a reinsurance contract in accordance with an inflation index.

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